SPECIAL REPORT SANCTIONS AND THE SOUTH AFRICAN ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-00927A005000040002-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 16, 2016
• Document Release Date: December 20, 2004
• Sequence Number: 2
• Publication Date: September 3, 1965
• Content Type: REPORT

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Copy No.
SPECIAL REPORT
SANCTIONS AND THE SOUTH AFRICAN ECONOMY
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CENTRAL INTELLIGENCE AGENCY
O F F I C E O F R E S E A R C H A N D R E P O R T S
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SANCTIONS AND THE SOUTH AFRICAN ECONOMY
Within the next several months, the Interna-
tional Court of Justice is expected to rule against
the Republic of South Africa on the issue of its
continued administration of South-West Africa.
When it does, Afro-Asian and Communist demands
for wholesale economic sanctions against South
Africa, particularly by the main trading partners,
the US and UK,are certain to reach a new high.
The booming South African economy, however, re-
mains the most modern and best balanced in all Af-
rica, and the threat of economic sanctions has
spurred it to attain increasingly greater self-
sufficiency. The Afro-Asian and Communist trade
boycott instituted some three years ago to force
changes in South Africa's racial policies has been
no more than a nuisance to the republic, and in
mid-1965 its economy was measurably less suscepti-
ble to outside economic pressures than when the
boycott began.
General Economic Condition
The last four years of eco-
nomic boom have wrought dramatic
changes in the makeup of the
South African economy, which con-
tinues to break nearly all pro-
duction records. New industries
have been started, and existing
ones have been expanded markedly.
South Africa now has the begin-
nings of a substantial armaments
industry and soon will be pro-
ducing its own military aircraft.
Automobiles and trucks, which
heretofore were only assembled
in the Republic from components.
imported from abroad, will even-
tually be produced almost wholly
within South Africa.
kaans-speaking South Africans,
once content to leave the Re-
public's factories in the hands
of their English-speaking com-
patriots, now control a grow-
ing number of the country's
manufacturing plants.
South Africa's prodigious
mineral wealth is being exploited
at record levels. Indeed, rap-
idly expanding gold production
has been a major factor in
sparking the boom. There have
also been rising earnings on
merchandise exports, sharp in-
creases in government expendi-
tures, especially on defense,
and a rapid introduction of new
technology.
Foreign investment, chiefly
from the UK and US, is responsi-
ble for many of the new plants
and much of the new equipment,
but an increasing amount of in-
dustry is locally owned. Afri-
As a result of all this ac-
tivity, the slack in the econ-
omy has been just about elimi-
nated,. Resources are now fully
employed, prices are going up,
gold production continues to
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TABLE I
SOUTH AFRICA'S GROSS NATIONAL PRODUCT
(In Millions of US Dollars at 1958 Prices)
1960
1961
1962
1963 1964
Private consumption
4,929
4,866
5,191
5,664 6,303
Public consumption
757
809
934
1,011 1,116
Gross capital formation
1,525
1,494
1,485
1,791 2,038
Exports of goods and nonfactor services
2,206
2,374
2,512
2,678 2,762
Imports of goods and nonfactor services
-1,877
-1,730
-1,792
-2,139 -2,674
Net factor income from abroad
-281
-316
-280
-284 -297
Terms of trade adjustment
-28
11
13
-52 78
Gross national product
7,231
7,508
8,063
8,669 9,326
Percent increased
-
3.8%
7.4%
7.5% 7.6%
TABLE II
CONTRIBUTIONS OF SOUTH AFRICA TO FREE WORLD SUPPLY
OF SELECTED MINERALS I N 1963
Percent of
Commodity Free World Production
Gold 70.4
Chromium ore 33.5
Platinum-group metals 41.8
Antimony 37.4
Manganese ore 20.3
Vanadium
Uranium, U308
Diamonds
Asbestos
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increase, although at a declin-
ing rate, and more and more
locally produced goods are be-
ing consumed within South Af-
rica. In fact, unless the gov-
ernment markedly alters its
policy of keeping nonwhites out
of many jobs, additions to the
labor force will be well below
the level required. Although
the economy will continue to
grow at a respectable rate,
some slowdown from four years
of boom is inevitable. This
slowdown does not, however, in-
dicate any basic weakness in
the economy.
Despite the apparent fu-
tility of their campaign, Afro-
Asian and Communist countries
with little or no stake in trade
with South Africa will continue
to demand that the Republic's
major trading partners institute
a boycott. They will not be de-
terred by the evidence that such
actions could have extremely
serious consequences--especially
for the UK--or by the growing
consensus in responsible quart-
ers that South Africa would be
able to outlast any such boy-
cott.
The composition of South
Africa's economy, its geographi-
cal setting, and the determina-
tion of the government to go
its own way all combine to make
the country one of the least
vulnerable to economic sanctions.
The Changing Economy
Accelerated industrializa-
tion in South Africa has been
accompanied by a relative de-
cline in agriculture, whose
share of the net domestic prod-
uct fell to only nine percent in
1964. Part of this decline re-
flects a prolonged drought, but
most of the change results from
the shift of resources into manu-
facturing, construction, and min-
ing.
Mining production jumped
from $550 million in 1955 to
more than $1 billion in 1964.
In the same period, the private
manufacturing and construction
sector grew from $1.1 billion
to $2.4 billion, an increase of
about 113 percent. By comparison,
agriculture grew only 21 percent
during the same decade.
An unusually large share of
South Africa's income is the re-
sult of foreign investment. In
fiscal year 1964 about 7.2 per-
cent of the net domestic product
went to overseas investors, in-
cluding $95 million in salaries
and wages earned by foreigners
in South Africa.
Net domestic product esti-
mates for calendar year 1964
are not available, but according
to South African statistics re-
leased at mid-year 1965, gross
national product in 1964 increased
by 7.6 percent, maintaining the
level of the previous two years.
(see Table 1).
Mining
South Africa is a major sup-
plier of minerals to the free
world--almost $1.5 billion worth
last year--and consuming coun-
tries would have difficulty find-
ing alternative sources (see
Table II).
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Gold production dominates
the country's mineral industry.
In 1964, output reached 29.1
million fine ounces, equivalent
to 70.4 percent of free world
production. Gold sales totaled
about $1.023 billion in 1964,
a 27-percent increase over 1961.
New mines have been opened, and
higher rates of production have
been achieved in some existing
mines. Many older mines, how-
ever, especially in Witwaters-
rand,, operate at very little
profit. Annual production-in-
creases seem likely to continue,
but rates of increase will cer-
tainly decline barring new dis-
coveries. Gold production rose
10.7 percent in 1962, but only
6.4 percent in 1964.
Diamond production jumped
more than 20 percent in 1964,
and sales brought a record $61.9
million. Production increases
in the Republic's mandated ter-
ritory of South-West Africa were
even more striking than in the
Republic itself. Sales of
South-West Africa's gem and in-
dustrial diamonds which are
marketed through the Republic
amounted to about $84 million in
1964--some 47 percent over 1963.
Although the spectacular growth
in 1964 may not be repeated,
diamond production in both the
Republic and in South-West Af-
rica is likely to continue to
increase markedly. Rich fields
have been discovered in northern
Cape Province. Further, the in-
novation of offshore dredging
has been very successful in South-
West Africa. Last year 286,000
carats'worth--close to $8 mil-
lion, or almost 10 percent of
the value of the territory's
total diamond production--were
recovered in this fashion.
Oil has not yet been found,
despite a relatively intensive
search. Coal is used for about
85 percent of the Republic's
energy requirements, is essen-
tial to the transport system,
and is the feedstock for a grow-
ing synthetic gasoline industry.
The country's coal reserves are
enormous: 25 billion tons of
proved reserves, and 50 billion
tons of known but not yet proved
reserves. Production in 1964
reached 49 million tons, worth
in excess of $100 million.
Agriculture
Farming is decreasing in
importance relative to other
economic sectors, but still pro-
vides the bulk of the Republic's
exports other than gold. South
African crops, like those of
the United States, range from
temperate to tropical products.
Corn has been a most im-
portant export crop, and the six-
million-metric-ton harvest in
mid-1963 produced a considerable
export surplus. However,
drought reduced the 1964 har-
vest to less than 4.3 million
metric tons, and the crop har-
vested this past July was even
smaller. For the first nine
months of 1964, corn exports
earned about $133 million in
foreign exchange, but sales
this year will fall off sharply
and exports in 1966 are expected
to be negligible. As a result
of the corn shortfall, over-all
South African agricultural pro-
duction in 1963-64 increased
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INDEXES OF MANUFACTURING OUTPUT
(Base: 1956/57 = 100)
1961 1962
1963
1964
Food
122.9 127.3
135.0
140.8
Beverages
130.4 137.7
155.9
178.8
Tobacco
93.5 91.4
98.6
102.6
Textiles
163.6 177.7
190.0
221.2
Clothing and footwear
117.6 119.3
129.3
143.0
Timber
108.6 124.4
139.1
144.1
Furniture
103.5 105.4
118.9
131.7
Paper and paper products
137.8 155.0
182.9
199.2
Printing
135.4 144.9
169.5
191.4
Leather and leather products
96.7 100.3
107.7
117.7
Rubber products
103.8 106.2
118.3
135.5
Chemicals and chemical products
129.7 142.5
156.5
176.6
Petroleum and coal products
138.6 149.6
182.4
291.0
Nonmetallic mineral products
112.8 113.3
127.7
156.7
Basic metals
134.8 139.5
165.9
186.7
Metal products
105.8 115.3
137.8
164.1
Machinery
122.0 131.4
140.6
158.5
Electrical machinery
120.8 129.6
155.4
184.9
Transport equipment
104.2 130.6
179.4
226.6
Miscellaneous
142.0 160.0
171.5
201.4
Composite weighted index
122.0 130.3
148.3
170.1
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less than one-half of one per-
cent over the previous year.
Manufacturing and Construction
From a 1956-57 base, manu-
facturing output increased more
than 70 percent by the end of
1964. The greatest growth oc-
curred in the more sophisticated
manufactures and in certain
basic industrial activities. Pe-
troleum and coal products, for
example, increased 191 percent,
transport equipment 127 percent,
electrical machinery 85 percent,
and chemicals and chemical prod-
ucts 77 percent. Large addi-
tions to capacity in 1964 are
likely to result in even more
substantial increases in output
(see Table III)
Thus far, at least, foreign
and local investors have shown
no appreciable reluctance to in-
vest in South Africa, and govern-
ment efforts to increase invest-
ment in industry have been very
successful. For example, work
has begun on a $32-million Cal-
tex refinery, construction is
under way on a $17-million Japa-
nese automobile factory, a
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$34-million aircraft factory is
programed, and the Anglo-Ameri-
can Corporation is planning a
$140-million steel-vanadium proj-
ect at Witbank. Much of this
new investment will reduce the
Republic's dependence on imports
and hence, to some degree, the
effects of any boycott. Rates of
return, reported to range between
20 and 30 percent annually, pro-
vide a major incentive to in-
vestors.
South Africa's widespread
shortage of skilled labor may be-
come acute despite heavy additions
to both the white and nonwhite
labor force. Pressures are grow-
ing to end or modify the govern-
ment's practice of reserving cer-
tain jobs and trades for whites
only.
Immigration has increased,
but government efforts to ease
the shortage of skilled workers
by recruiting abroad have failed,
partially because of the "unset-
tled political situation" in
South Africa. Many skilled work-
ers were unwilling to move to a
country which might be the target
of "unfavorable" international ac-
tions in the near future.
As a practical matter, the
job-reservation policy is becom-
ing more honored in the breach,
and in increasing instances white
and nonwhite employees work side.
by side, although at markedly dif-
ferent pay scales. This erosion
of apartheid in the labor field
is causing considerable concern
among white unionists. Some
unions reportedly will insist
that the infiltration of nonwhite
workers into traditionally white
jobs be controlled, and that non-
white workers be permitted to
join white unions or that non-
white unions be given legal
status. Many white unionists
are disturbed by increasing em-
ployer preference for lower paid
nonwhites. Labor leaders also
fear that an increase in nonwhite
workers will enable employers
effectively to resist demands
for wage increases from the white
labor force.
As a result, these union-
ists are now arguing that a non-
white who does a white man's
work must receive the same salary
as the white worker. They also
claim some white unions represent
Africans, despite legal prohibi-
tions. In addition, they note
that white unions accept colored
and Indian workers in the Cape
Province, and that these non-
whites are moving into white jobs
as more and more employers simply
ignore job reservation.
Foreign Trade
Much of the equipment and
material needed to sustain South
Africa's economic growth is im-
ported from the industral coun-
tries of Western Europe, from
the United States, and more re-
cently from Japan. In return,
South Africa ships most of its
exports to these markets. Only
a negligible amount of trade is
with independent African coun-
tries, which at least partially
explains the failure of the Af-
ro-Asian boycott to cause South
Africa more than minor incon-
veniences.
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TABLE IV
DIRECTION OF SOUTH AFRICAN IMPORTS
Monthly Averages in Thousand US Dollars
January - September
1963
1964
United Kingdom
40,946
48,992
United States
22,714
33,189
West Germany
14,997
15,234
Japan
6,556
9,442
Canada
4,968
5,627
Italy
4,069
5,194
France
4,083
4,540
Netherlands
3,399
4,338
Switzerland
2,263
3,301
Sweden
2,333
2,885
Total all countries
1
3 6, 730
173,477
In 1963 the bulk of the Re-
public's imports came from the
UK (about 30 percent), the US
(almost 17 percent), and West Ger-
many (nearly 11 percent). In-
complete trade data for 1964 in-
dicate that the US and Japan in-
creased exports to South Africa
substantially. For the first nine
months of 1964, the monthly aver-
age of US exports was about $33
million, 46 percent more than the
same period in 1963. Japanese
exports rose 44 percent during
the same time span. Exports from
the United Kingdom increased 20
percent (see Table IV).
The UK bought a third of
South Africa's exports in 1963
and was again the largest purchaser
in 1964. The US, however, slipped
from second place in 1963 to
third place after Japan in 1964.
This change was the result of
a sharp increase in Japanese
purchases rather than a sharp
decline in South African ex-
ports to the US. Japanese im-
ports from the Republic in-
creased about 32 percent during
the first nine months of 1964,
compared with the same period
in 1963. West Germany, South
Africa's fourth most important
customer, also increased imports
--by almost 14 percent (see
Table,V) ,
South African exports are
largely agricultural and mineral
products. Imports are mostly
DIRECTION OF SOUTH AFRICAN EXPORTS
(Monthly Average in Thousand US Dollars)
January - September
1963
1964
United Kingdom
32,279
34,360
Japan
7,647
10,068
United States*
8,417
8,883
West Germany
5,466
6,239
Belgium
4,544
5,938
S. Rhodesia
...
5,930
Italy
5,227
4,900
France
3,245
3,457
N. Rhodesia
...
3,305
Netherlands
3,072
2,502
Total all countries
104,372
110,032
* Excluding uranium.
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manufactured goods, machinery
and transport equipment, chemi-
cals, and petroleum. In 1963
imports of goods in these cate-
gories totaled $1.3 billion,
about 77 percent of all imports.
Petroleum products alone were
$107 million. The largest cate-
gory of US exports to the Re-
public last year was nonelectric
machinery ($125 million), fol-
lowed by chemicals ($52 million),
textiles ($38 million), and
motor vehicles ($27 million).
In 1964, total imports rose
about 23 percent, but exports
increased only 6.5 percent. As
a result, the trade deficit in-
creased sharply from $390 mil-
lion in 1963 to $710 million
last year. South Africa's gold
output, in excess of $1 billion,
helped to finance this deficit,
but for the first time in recent
years the current account went
from a favorable balance of
$207 million in 1963 to a deficit
of $109 million in 1964.
By 9 July 1965, gold and
foreign exchange reserves had
reached a low of $475 million.
Despite the warning signs evi-
dent in the balance of payments
and the continuing decline in
reserves, South African offi-
cials do not seem unduly con-
cerned. Clearly, however, bar-
ring an unlikely upsurge in ex-
ports, imports will have to be
reduced before many more months.
The Boycott
The Afro-Asian and Commu-
nist trade boycott of South Af-
rica--designed to win a reversal
or major amelioration of the
Verwoerd government's apartheid
policies--has in fact been coun-
terproductive. Instead of weak-
ening the economy, it has given
impetus to the government's pro-
gram of economic nationalism and
helped to stimulate the Republic's
rapid growth. The boycott's
failure to influence appreciably
South Africa's domestic policies
points up the relative unimpor-
tance of the Afro-Asian and Com-
munist countries in the Repub-
lic's trading pattern and the
necessity for the Republic's ma-
jor trade partners to participate
if sanctions are to be effective
at all.
Furthermore, many African
countries continue quietly to
trade with South Africa, which
has suppressed its foreign trade
data since January 1964 so as
to avoid Afro-Asian harassment
of those countries.
South Africa's nrom official
trade statistics and replaced it
with a "miscellaneous" category.
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Even before the boycott,
South Africa's trade with the Com-
munists was not very important.
In 1963, its exports to the Com-
munist world were about $15 mil-
lion, of which China took $6 mil-
lion, and imports were less than
$12 million. Although this trade
has since declined sharply, it is
continuing, either directly or,
especially in the case of China
through third parties.
Neither Japan nor Iran, the
Republic's major Asian trading
partners, has shown any inclina-
tion to restrict trade. Iran,
which supplies the bulk of South
Africa's petroleum requirements,
has already pleaded before the UN
an inability to halt shipments of
oil, pointing out that Iranian
oil exports are handled by a con-
sortium of foreign companies
rather than by the government.
Tehran also argued that experience
had shown that when supplies from
one country were stopped, the gap
was immediately filled by other
countries.
Although an oil embargo is
a favorite subject for those
pushing for economic sanctions,
South Africa's vulnerability to
this form of pressure is more ap-
parent than real, especially in
view of the world oil surplus.
Moreover, commercial interests
of producing countries tend to
outweigh political causes that
do not immediately affect them.
Iran, for example, still sup-
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plies most of Israel's oil needs,
despite years of protests by
Arab governments. Furthermore,
South Africa has taken steps to
reduce its petroleum vulnerability;
it is building more storage facili-
ties, adding new refining capacity,
and is investigating setting up
its own oil-tanker fleet which
would operate under a flag of
convenience.
South Africa's indifference
to African pressure tactics also
extends to possible secondary
boycotts against countries and
companies doing business with the
Republic. South African Airways
has already been banned from most
African countries, but the com-
pany has maintained the increas-
ingly profitable routes to Europe
through Lisbon via Portuguese
West African Territories and the
Canary Islands. If foreign air-
lines were prevented from serv-
ing South Africa, the country
would be further isolated, but
this would not be serious.
A marked reduction in ocean
shipping serving South Africa
could deal the Republic a crip-
pling blow, but an effective
secondary shipping boycott is
almost inconceivable. The ships
of the three US lines serving
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South Africa generally make no
stops on the continent other than
at South African and Portuguese
African ports. For lines serving
other ports, South African ton-
nages are far more important than
the sum of cargoes collected along
either the East or West African
coasts--probably worth five or
six times the combined totals of
Kenya, Uganda, and Tanzania. Thus,
shipping interests might well
choose to cut out other countries
rather than abandon their more
profitable South African calls.
The Effect of Sanctions
With the complete failure
of their own halfhearted efforts
to boycott South Africa, the Afro-
Asian countries have turned their
attention increasingly toward en-
listing the participation of the
Republic's major trading partners.
On 1 December 1964 the Organiza-
tion of African Unity sought such
support, arguing that "the regime
can be forced to come to its senses
or to relinquish its hold over the
governmental machinery in South
Africa ... (through) the use ofitcon-
certed economic sanctions....
Four days later the OAU apparently
concluded the job was simpler
and that "a total embargo on the
sales of rubber to South Africa
can sufficiently achieve the above
purpose." Earlier it held a simi-
lar position with respect to an
oil embargo.
However, independent studies
on South Africa's ability to with-
stand boycotts of selected items
such as petroleum or rubber gen-
erally agree that the country's
economy could stand such denials
indefinitely. The Republic's
Many Afro-Asian countries
refuse to recognize the military,
political, and economic realities
involved in a boycott of South
Africa, or the fact that boy-
cotts simply do not work. Even
the present arms embargo, agreed
to by most countries, has not
halted the flow of weapons to
South Africa. France, for ex-
ample, is quite willing to sup-
ply South Africa a variety of
military wares and, as a matter
of principle, refuses to con-
sider an economic boycott and
has even declined to participate
in UN discussions of the problem.
British Prime Minister Wilson
has called oil sanctions "some-
thing very relevant to near-war
or war situation." The UK con-
siders British implementation of
economic sanctions completely
out of the question, partly be-
cause of the virtual impossibil-
ity of enforcing an embargo, but
chiefly because the cost to the
British economy would be prohib-
itive. Neither West Germany nor
Japan has shown the slightest in-
clination to take any initiative
in economic sanctions.
South African Countermeasures
In clamoring for a boycott,
South Africa's more vocal Afri-
can critics seem unaware or un-
concerned about the Republic's
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ability to institute counter-
measures. Likely targets would
be the British High Commission
Territories adjacent to or sur-
rounded by South Africa. The
UK has reported to the UN that,
if South Africa cut off trade
with the territories, the ef-
fect would be "disastrous" in
Basutoland and a "severe eco-
nomic crisis would develop for
Bechuanaland which the United
Kingdom would be powerless to
avert." The prospect for Swazi-
land was described as likely to
be "serious." Should South
Africa also repatriate migrant
labor, the problem would be even
worse.
South Africa's role as the
world's largest gold supplier
gives it a potent economic weapon
of reprisal. A denial of South
African gold exports to world
money markets either by South
African initiative or as the re-
sult of a boycott would be most
serious. There is already a
greater demand for monetary gold
than can easily be satisfied from
present stocks. Furthermore, the
increasingly propensity of some
countries, France for example, to
hold gold rather than dollars is
putting an additional strain on
dwindling US gold stocks. Mone-
tary authorities are increasingly
concerned with the problem of
international liquidity and, given
the present makeup of the world
monetary system, the denial of
South Africa's annual addition
of over a billion dollars to
the world gold supply would likely
have an extremely deleterious
eff ect. F_
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